TRANSPORT REFORM AND REHABILITATION CENTER CREDIT NO.5108-GE (THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT) Special Purpose Project Financial Statements For the Year Ended 31 December 2015 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO.5108-GE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 1 INDEPENDENT AUDITORS' REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015: Statement of Sources and Uses of Funds 4 Balance Sheet Statement 5 Statement of Expenditure Withdrawal Schedule 6 Special Account Statement 7 Notes to the Special Purpose Project Financial Statements 8-12 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO.5108-GE STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 Management of the Third East-West Highway Improvement Project (the "Project") implemented by the Transport Reform and Rehabilitation Center (The "Center") is responsible for the preparation of the special purpose project financial statements that present fairly the financial position of the Project as at 31 December 2015, and its sources and uses of funds and movement in special account for the year ended 31 December 2015, in compliance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under the Cash Basis of Accounting ("IPSAS - Cash Basis), and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" (the "World Bank Guidelines"). In preparing the special purpose project financial statements, management is responsible for: * Properly selecting and applying accounting policies; * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * Providing additional disclosures when compliance with the specific requirements in IPSAS - Cash Basis, are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Project, financial position and its sources and uses of funds and movements in special accounts; * Making an assessment of the Projects ability to continue as a going concern. Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of intemal controls, throughout the Project; * Maintaining adequate accounting records that are sufficient to show and explain the Project's transactions and disclose with reasonable accuracy at any time the financial position of the Project, and which enable them to ensure that the special purpose project financial statements of the Project comply with the Guidelines on Annual Financial Reporting and Auditing for World Bank - Financed Activities issued by the World Bank's Financial Management Sector Board; * Maintaining statutory accounting records in compliance with Georgian legislation; * Taking such steps that are reasonably available to them to safeguard the assets of the Project; and * Preventing and detecting fraud and other irregularities. The special purpose project financial statements for the year ended 31 December 2015 were authorized for issue on 30 June 2016 by the Management. On behalf of Management: Giorgi Tsagareli Marina MajaggWdze Director Financial Manager 30 June 2016 30 June 2016 1 KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone +995 322 93 5713 Fax +995 322 98 2276 Internet www.kpmg.ge Independent Auditors' Report To the management of the Transport Reform and Rehabilitation Center We have audited the accompanying special purpose project financial statements of the Additional Financing for the Third East-West Highway Improvement Project (the "Project"), financed under the International Development Association (the "IDA"), Credit Agreement No. 5108-GE dated 28 June 2012, implemented by the Transport Reform and Rehabilitation Center (the "Center"), which comprise the Statement of Balance Sheet as at 31 December 2015 and the Statements of Sources and Uses of Funds, Statement of Expenditure Withdrawal Schedule ("SOEs") and Special Account Statement for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. The special purpose project financial statements have been prepared by management in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank-Financed Activities" (the "World Bank Guidelines") as described in Note 2 to the special purpose project financial statements. Management's Responsibility for the Special Purpose Project Financial Statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines, for determining the acceptability of the basis of accounting, and for such internal control as management determines is necessary to enable the preparation of special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these special purpose project financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the special purpose project financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose project financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the special purpose project financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the special purpose project financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG Georgia LLC, a compay incorporated under the Laws of Georga, a member firm of tlw KPMG network of independnt member firms affiliated with KPMG Interational Cooperative (KPMG International), a Swiss entity. Transport Reform and Rehabilitation Center Independent Auditors' Report Opinion In our opinion, the special purpose project financial statements for the year ended 31 December 2015 present fairly, in all material respects, the financial position of the Project as at 31 December 2015, and its sources and uses of funds for the year then ended in accordance with the International Public Sector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting and the World Bank Guidelines. Other Matters The special purpose project financial statements of the Project as at and for the year ended 31 December 2014 were audited by other auditors whose report dated 22 June 2015 expressed an unmodified opinion on those statements. Data included on pages 4 to 12 of the accompanying special purpose project financial statements that are marked as "Unaudited" have not been audited. Basis of Accounting Without modifying our opinion, we draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Center to comply with the requirements of IDA and for providing information to the Government of Georgia and IDA to assist them in evaluating the Project implementation. As a result, the special purpose project financial statements may not be suitable for another purpose. KPMG Georgia LLC 30 June 2016 3 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Actual Planned Variance Year to Cumulative Year to Cumulative Year to "umulative to date to date date to date date date Unaudited Unaudited Unaudited Unaudited FUNDS RECEIVED BY SOURCES International Development Association (IDA) funds 10,847,116 36,207,058 Government of Georgia ('GoG") co-financing 2,377,485 11,033,701 TOTAL FUNDS RECEIVED 13,224,601 47,240,759 Foreign exchange difference - (31) LESS: EXPENDITURES Component 1 - Construction of Sveneti-Ruisi section 7,406,658 26,900,331 7,406,658 26,900,331 - Component 2 - Roads Safety 1,792,219 4,194,948 1,792,219 4,194,948 - Component 3 - Project Management 53,734 204,739 53.734 204,739 - IDA TOTAL 9,252,611 31,300,018 9,252,611 31,300,018 - Component 1 - Construction of Sveneti-Ruisi section 1,895,228 9,909,503 1,895.228 9.909,503 - Component 2 - Roads Safety 448,382 1,052,560 448.382 1,052,560 - Component 3 - Project Management 33,848 71,607 33,848 71,607 - GoG TOTAL 2,377,458 11,033,670 2,377,458 11,033,670 - TOTAL PROJECT EXPENDITURES 11,630,069 42,333,688 11,630,069 42,333,688 - NET (OUTFLOW)IN FLOW OF FUNDS 1,594,532 4,907,040 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagarell Marina Majagafi&6 Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 4 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE BALANCE SHEET STATEMENT AS OF 31 DECEMBER 2015 (In US Dollars) 31 December 2015 ASSETS IDA Designated Account 4,907,040 TOTAL ASSETS 4,907,040 Funds received: Funds received from IDA 36,207,058 Funds received from GoG 11,033,701 Total funds received 47,240,759 Project expenditures: Financed by IDA (31,300,018) Financed by GoG (11,033,670) Total project expenditures (42,333,688) Foreign exchange difference (31) TOTAL PROJECT EXPENDITURES AND OTHER FUNDS 4,907,040 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagareli - Marina Majagdidz Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 5 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE STATEMENT OF EXPENDITURE WITHDRAWAL SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Withdrawal Withdrawal Total SOE Total SOE Total SOE Attributable Attributable Attributable Total SOE No. application in attributable attributable to 2015 - to 2015 - to 2015 - Attributable date withdrawal to 2014 to 2015 Component Component Component to 2016 - schedule 1 2 3 Unaudited 9 18 Feb 15 5,072 3,621 1,451 - 1,451 - 10 9 Jul 15 5,533 - 5,533 - 5,533 - 11 28 Oct 15 37,639 - 37,639 - 3,190 34,449 - 12 16 Mar 16 53,862 - 45,443 - 26,105 19,338 8,419 102,106 3,621 90,066 - 36,279 53,787 8,419 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagareli Marina Majalhdze Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 6 TRANSPORT REFORM AND REHABILITATION CENTER THIRDT EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE SPECIAL ACCOUNT STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) Account No. 202250928 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Balance as at 1 January 2015 3,312,535 ADD Funds received from IDA 10,847,116 DEDUCT Funds used for the Project expenditures (9,252,611) Balance as at 31 December 2015 4,907,040 The special purpose project financial statements were approved by the management of Transport Reform and Rehabilitation Center on 30 June 2016 and were signed on its behalf by: Giorgi Tsagareli Marina Majagad1C Director Financial Manager 30 June 2016 30 June 2016 The notes on pages 8 to 12 form an integral part of these special purpose project financial statements. 7 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars 1. BACKGROUND The Investment Center for Euro-Asian Transport Corridor was established in 1995 as a non- entrepreneurial and non-profit legal entity under the laws of Georgia in accordance with the Georgian Presidential Decree N 119 dated 16 April 1995. The founder of the Investment Center for Euro-Asian Transport Corridor is the Georgian Government. A project unit named "Transport Reform and Rehabilitation Center" (the "Center") was formed within the Investment Center for Euro-Asian Transport Corridor. The Center's principal activity is to manage allocated credits/loans received from the International Development Association ("IDA"), the International Bank for Reconstruction and Development ("IBRD"), the Asian Development Bank (ADB) and the European Investment Bank (EIB) and monitor the implementation of transport sector projects. The Center implements the Third East-West Highway Improvement Project (the "Project"), financed under the International Development Association ("IDA"). Credit Agreement No. 5108-GE (the "Agreement") in the amount of 27.7 million Special Drawing Rights ("SDR") was signed between the Government of Georgia ("GoG") and IDA on 28 June 2012. The main objectives of the Project are: to contribute to the gradual reduction of road transport costs and improve access, ease of transit and road safety along central part of the East-West Corridor of Georgia and strengthen the capacity of the Road Department in the Ministry of Regional Development and Infrastructure of Georgia (RDMRDI) and relevant government entities to plan and manage the road network and to improve road safety. 2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES Statement of compliance - These special purpose project financial statements have been prepared in accordance with the Cash Basis International Public Sector Accounting Standard, Financial Reporting under a Cash Basis of Accounting and in conformity with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank- Financed Activities" (the "World Bank Guidelines"). The purpose of these special purpose project financial statements is to provide information to the Government of Georgia and the International Development Association to assist them in evaluating the Project implementation. Cash basis of accounting - Project financing is recognized as a source of project funds when the cash is received. Project expenditures are recognized as a use of the Project funds on the cash basis when the payments are made. Presentation currency - The national currency of Georgia is the Georgian Lar ("GEL"). These special purpose project financial statements are presented in United States Dollars ("US Dollar" or "USD"), since management believes that this currency is more meaningful for the users of the special purpose project financial statements. All financial information presented in USD has been rounded to the nearest USD unless otherwise stated. Transactions in other currencies - Transactions in currencies other than the presentation currency are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Cash - Cash represents the balances with the State Treasury of Georgia. 8 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 3. SPECIAL ACCOUNT The special account is a designated disbursement account of the Project maintained in US Dollars at the State Treasury to ensure the payment of eligible expenditures, within defined limits, which do not require individual authorisation from IDA in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Agreement, the expenditures of all works, goods and consultant services contracts, including all applicable taxes are co-financed by proceeds received from IDA and the GoG at a proportional rate of 80% and 20%, respectively. The land acquisition and associated resettlement costs are funded entirely by the GoG. 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the credit to 31 December 2015 were as follows: (a) Special Account The Center withdraws the eligible amounts from the special account and prepares and sends replenishment requests to the World Bank with authorized signatures. The replenishment requests and respective documentation are reviewed by the World Bank and an approved amount is transferred to the special account. (b) Direct Payment Available amounts are drawn from time to time within limits determined under the credit agreement for direct payments of eligible expenditures for sub-projects. Direct payments are made by the World Bank directly to third parties. The Center forms withdrawal applications for request of direct payments and sends it to the World Bank, for settlement. (c) GoG Current Account The Project maintains a separate account where funds from the GOG are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. The Project has a common GEL account and special organization code for their funds in the State Treasury of Georgia. 6. STATEMENT OF EXPENDITURES (SOE) Withdrawals are to be made on the basis of SOEs for expenses on contracts within the following contractual limits: (i) All expenditures for works valued at less than USD 2,000,000; (ii) Consultant services contracts (firms) valued at less than USD 100,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; (iv) All expenditures for goods and non-consulting services valued at less than USD 300,000. 9 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 7. RECONCILIATION OF AMOUNTS SHOWN AS RECEIVED FROM THE IDA TO ACTUAL EXPENDITURES OF THE PROJECT 31 December 2015 Application of Withdrawals Schedule Expenses incurred in 2015 as per the Applications of Withdrawals Schedule 9,252,611 Expenses incurred in 2015 without Applications of Withdrawals Schedule - 9,252,611 IDA funds received in 2015 10,847,116 10,847,116 Add: Opening Balance Special Account 3,312,535 3,312,535 Less: Closing Balance Special Account 4,907,040 4,907,040 TOTAL EXPENDITURES INCURRED IN 2015 9,252,611 10 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 {n US Dollars) 8. PROJECT EXPENDITURES BY COMPONENTS Actual Planned Variance Project activities Year to Cumulativ Year to Cumulativ Year to Cumulative date e to date date e to date date to date Unaudited Unaudited Unaudited Unaudited Component I - Construction of Sveneti-Ruisi section Civil works 9,272,494 33,629,972 9,272,494 33,629,972 Land acquisition and 29,392 3,179,862 29,392 3,179,862 Resettlements - - TOTAL COMPONENT 1 9,301,886 36,809,834 9,301,886 36,809,834 Component 2 - Roads Safety Consultancy 2,240,601 5,116,501 2,240,601 5,116,501 - Vehicles, office equipment and - 131,007 - 131,007 computers for RDMRDI - - TOTAL COMPONENT 2 2,240,601 5,247,508 2,240,601 5,247,508 Component 3 - Project Management The Center's fees and 70,059 70,059 70,059 70,059 operating costs Financial audit 17,523 52,569 17,523 52,569 RDMRDI Consultants - 153,718 - 153,718 TOTAL COMPONENT 3 87,582 276,346 87,582 276,346 TOTAL PROJECT EXPENDITURES 11,630,069 42,333,688 11,630,069 42,333,688 The Project consists of the following main components: * Component 1 - Upgrading the existing E60 East-West Highway form Sveneti to Ruisi to a dual carriageway road; * Component 2 - Institutional strengthening; * Component 3 - Institutional support to the Road Department in the Ministry of Regional Development and Infrastructure (RDMRDI) of Georgia and the Center related to the Project implementation, audits and the Project monitoring and evaluation. The categories of expenditures incurred are presented in line with the categories specified in the Agreement. Each component of the Project expenses is further divided into four types of expenses for The SOE purposes: civil works, goods, consultants' services and operating costs. 11 TRANSPORT REFORM AND REHABILITATION CENTER THIRD EAST-WEST HIGHWAY IMPROVEMENT PROJECT CREDIT NO. 5108-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in US Dollars) 9. COMMITMENTS AND CONTINGENCIES Management is not aware of any commitments and contingencies which would have a material impact on this special purpose project financial statements as at 31 December 2015 for the year then ended. 10. GEORGIAN OPERATING ENVIRONMENT The Center's operations are located in Georgia. Consequently, the Center is exposed to the economic and financial markets of Georgia, which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The special purpose project financial statements reflect management's assessment of the impact of the Georgian operating environment on the operations of the Center. The future operating environment may differ from management's assessment. 11. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE There were no significant events subsequent to the balance sheet date. 12. APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS These special purpose project financial statements were authorized for issue by the management of the Center on 30 June 2016. 12